Consumer Behaviour & Demand
Consumer Behaviour & Demand
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Economics starts by assuming that buyers and sellers each choose with a purpose, weighing what an option is worth against what it costs.
Every day you choose how to spend limited money: the bus or a taxi, a snack now or savings for the weekend. Shops, factories and airlines choose too: what to sell and what to charge. Anyone whose decisions shape a market is an economic agent.
Economic agent: an individual or organisation that makes decisions about how to use scarce resources, such as a consumer, a firm or the government.
To predict what agents will do, economics assumes each one has a clear aim and picks the option that gets it closest. For a consumer that aim is the most utility, the satisfaction from what they buy; for a firm it is the most profit, its revenue minus its costs.
Rational decision making: the assumption that economic agents weigh the benefits and costs of each choice to achieve their aim: consumers aim to maximise utility and firms aim to maximise profits.
Rational does not mean choosing the cheapest option, or never getting it wrong. Paying $200 more for a laptop with a better screen is rational if the screen is worth more than $200 to you. It means comparing what a choice adds with what it costs, using what you know at the time.
The assumption matters because it makes markets predictable. If buyers weigh benefit against cost, making one option cheaper should pull buyers towards it, and you can check whether it does.
Real Example: Norway exempted electric cars from VAT, a tax added to the price of most goods, and from the emissions-based registration tax that petrol and diesel cars pay. In 2025, 95.9% of new cars sold there were fully electric. When the VAT exemption was cut back from January 2026, buyers hurried to beat it: December's share was 97.6%.
Exam Matters: When a question uses the rationality assumption, state both halves: consumers aim to maximise utility, firms aim to maximise profit. Then show the weighing in the question's own setting, with its figures, rather than calling a choice 'sensible'.
To get the most satisfaction from your money, judge each extra unit on its own: buy it only if it is worth at least its price.
Think about the coach trips you might take in a month. The first, home to see family, matters a lot; a fourth matters much less. Economists call that satisfaction utility, and they measure it in two ways.
Utility: the satisfaction a consumer gains from consuming a good or service.
Total utility: the total satisfaction a consumer gains from all the units of a good consumed in a given period.
Marginal utility: the extra satisfaction a consumer gains from consuming one more unit of a good.
Satisfaction cannot be counted like money, so economists measure it by what a unit is worth to you: the most you would pay for it. That lets you set marginal utility beside a price and decide.
That is the rule of utility maximisation: keep buying while the marginal utility of the next unit is at least its price. Total utility still rises with every trip; what falls is how much each one adds.
Real Example: Between 2010 and 2015 Southern Water fitted nearly half a million water meters in south-east England. Unmetered homes paid a fixed charge, so an extra litre cost them nothing. Economists at the University of Southampton found that households cut their water use by 16.5% once metered: each litre now had a price, and uses worth less than that price stopped.
Exam Matters: To explain how much a consumer buys, compare the marginal utility of each unit with the price, one unit at a time, using the figures. Say where the next unit is worth less than its price: that is where the consumer stops.
Comparing every option takes effort, so real buyers often copy others, repeat last week's choice, or stay where they are.
Weighing every option takes time and attention, so people use shortcuts. Three common shortcuts mean a consumer may not aim to maximise utility at all, and each one changes how a market behaves.
Herding: when consumers follow the choices of other people instead of making their own judgement of costs and benefits.
A long queue at one food stall draws more people, while the stall next to it stays empty. Because buyers follow each other, demand can jump, and later collapse, far faster than prices or incomes change.
Habitual behaviour: when consumers repeat a routine purchase without considering the alternatives.
If you buy the same brand of rice every week, you stop noticing the cheaper bag beside it. Demand for a familiar brand then hardly reacts when a rival cuts its price, which is why firms fight so hard for your first purchase.
Inertia: the tendency to stay with a current choice or arrangement, even when a better option is available, because changing takes time and effort.
Habit is about purchases repeated on autopilot. Inertia is about not changing an ongoing arrangement, such as a phone plan, a bank or a default, even when a better one is on offer. Both make demand stickier than the rational model predicts.
Real Example: Since 2012, UK employers have had to enrol eligible workers in a workplace pension automatically, although any worker can opt out. Among eligible private-sector employees, the share saving in a workplace pension rose from 42% in 2012 to 86% in 2021, according to government figures. Most workers simply stayed with the arrangement they were given.
Exam Matters: Asked why a consumer may not maximise utility, take one reason at a time: name it, say what the buyer does instead of comparing costs and benefits, and give the result for what they buy or pay. Two reasons developed this way go further than a list of five.
Even buyers who try hard can misjudge a deal: the sums are hard, the purchase says something about them, or the way it is shown steers them.
Is a 400 g pack at $3 better value than a 750 g pack at $5? Few shoppers can work that out in the seconds they spend at a shelf, so they guess.
Poor computational skills: difficulty doing the calculations needed to compare options, such as prices per unit or interest rates, so the best-value choice is missed.
That is why, under a 1998 directive, EU law makes shops show a unit price, the price per kilogram or litre, beside the selling price.
The need to feel valued: buying a good partly for how it makes other people see the buyer, so status, not only the good's use, drives the choice.
To a buyer like that, a cheaper version without the famous logo is not the same good.
Then there is the way a choice is presented. In a 1988 US study, people rated beef labelled '75% lean' as tastier and less greasy than the same beef labelled '25% fat'.
Framing: the way information or a choice is presented, which can change a consumer's decision even when the facts are the same.
Bias: a systematic error in judgement that pushes decisions away from what a rational comparison would choose.
Anchoring: a bias in which consumers rely too heavily on the first piece of information they see, such as an original price, when judging a deal.
A jacket marked 'was $120, now $60' feels like a bargain because $120 becomes the anchor.
Rational choice still predicts well when a purchase is large, repeated and easy to compare, like petrol priced on a roadside board. These reasons bite hardest when the sums are complex, the good signals status, or the seller controls how the offer is described.
Real Example: Tata Motors unveiled the Nano in India in 2008 at an introductory price of 1 lakh rupees (100,000 rupees), marketed as the cheapest car ever. Tata expected to sell about 250,000 a year, but sales peaked at 74,527 in 2011-12, and by 2019 none were being made. In India a car is a sign of success, and 'cheapest' said the opposite.
Exam Matters: In a longer answer, follow one reason all the way: what the buyer does instead of comparing, and what that lets a firm do. Then weigh it by saying when rational choice still predicts well, such as large, repeated purchases that are easy to compare.
Wanting a good is not enough: economists count only what buyers are willing and able to pay for, at each price.
You might want a new phone, a holiday or a car. Unless you can also pay for one, no seller will ever notice. Economists count only wanting that is backed by the money to pay.
Demand: the quantity of a good or service that consumers are willing and able to buy at each price over a given period of time: the whole schedule is demand, and one point on it is the quantity demanded.
Every demand figure needs a price and a period. 'Demand for coach tickets is 800' tells a firm nothing; '800 tickets a day at a fare of $10' is a quantity demanded it can plan with.
Individual demand: the quantity of a good that one consumer is willing and able to buy at each price over a given period.
Market demand: the total of every individual demand: the quantity of a good that all consumers are willing and able to buy at each price over a given period.
Tafari Coaches runs a busy intercity route. The table shows how many tickets a day its passengers, together, are willing and able to buy at five fares.
Plot the table with price on the vertical axis and quantity on the horizontal, and you have Tafari's demand curve. It slopes down from left to right: the higher the fare, the fewer tickets are demanded.
Law of demand: as the price of a good rises, the quantity demanded falls, and as the price falls, the quantity demanded rises, ceteris paribus (all other things being equal).
Real Example: Between 2006 and 2009, researchers offered pregnant women at 16 clinics in western Kenya bed nets that protect against malaria, at prices set at random from free to $0.60. Take-up was 60 percentage points lower at $0.60 than when the nets were free. Each price gave one quantity demanded; together, the prices traced out the demand for nets.
Exam Matters: To define demand, fit three things into one sentence: willing and able to buy, at each price, over a given period. Leaving out the ability to pay turns demand into a wish.
When only a good's own price changes, buyers move along the demand curve they already have: no new curve is needed.
The law of demand says that a higher price means fewer units demanded. So when a good's own price changes and nothing else does, you do not need a new curve. You read the new quantity off the curve you already have.
Extension of quantity demanded: a rise in the quantity demanded caused by a fall in the good's own price, shown by a movement down along the demand curve.
Contraction of quantity demanded: a fall in the quantity demanded caused by a rise in the good's own price, shown by a movement up along the demand curve.
In both cases Tafari's passengers have not changed their minds about coach travel. At each fare they want exactly what the schedule always said; only the fare moved.
So the rule is simple. If the good's own price changes, show a movement along the curve. If anything else changes, such as incomes or the price of another good, the curve itself moves, which is called a shift.
Real Example: On 10 October 2017 the Delhi Metro raised its fares for the second time that year, the top fare from Rs 50 to Rs 60. Passengers took an average of 27.4 lakh (2.74 million) trips a day in September and 24.2 lakh in October. The fare was the Metro's own price, so this was a contraction: riders moved up the same demand curve.
Exam Matters: To draw a movement, use one demand curve only. Mark both prices on the vertical axis and both quantities on the horizontal with dashed lines, and put an arrow along the curve. A second curve would show a shift, which contradicts a change in the good's own price.
When something other than a good's own price changes, buyers want a different amount at every price, so the whole curve moves.
Suppose Tafari's fare stays at $15, yet it sells more tickets a day than before. The fare cannot explain that, so something else has changed. Buyers now want more tickets at $15, and at every other fare too.
Increase in demand: a rise in the quantity demanded at every price, caused by a change in a factor other than the good's own price, shown by a shift of the demand curve to the right.
Decrease in demand: a fall in the quantity demanded at every price, caused by a change in a factor other than the good's own price, shown by a shift of the demand curve to the left.
After the increase, 240 more tickets a day are wanted at every fare; after the decrease, 240 fewer. On a diagram you keep D1, draw the new curve beside it, and read both at the unchanged fare: at $15, quantity demanded goes from 600 to 840, or from 600 to 360.
Whatever the cause, as long as it is not the good's own price, the whole curve moves: right for more at every price, left for less.
Real Example: In 2022, as gas prices soared after Russia invaded Ukraine, heat-pump sales in Europe rose 38% to about 3 million units, according to the European Heat Pump Association. The gas heating they replace had become dearer, so more heat pumps were wanted at every price. As energy prices settled in 2023 and 2024, sales fell back: the curve shifted left again.
Exam Matters: When you draw a shift, keep D1, add D2 with an arrow between them, and label both axes. Then mark the unchanged price and read off both quantities with dashed lines: that reading shows what the shift did.
Each extra unit of a good is usually worth a little less to you than the one before, so you buy more only when the price falls.
A first cold drink on a hot afternoon is wonderful; a fourth is hard to finish. Nothing about the drink changed. What changed is how much one more adds.
Law of diminishing marginal utility: as a consumer consumes more units of a good in a given period, the marginal utility from each additional unit falls.
The most you will pay for a unit is what it adds for you, its marginal utility. So as you buy more, the price you would pay for the next one falls, and that is what gives an individual demand curve its shape.
Add every passenger's curve together and the market curve slopes down too, for two reasons: each passenger's extra trips are worth less to them, and a lower fare also brings in passengers for whom no trip was worth the old fare.
Amara's values are not fixed for ever. If something other than the fare changes, such as her income or the price of a flight, each trip is worth a different amount to her at every quantity. Her whole marginal-utility schedule moves, and her demand curve shifts with it.
Real Example: Singapore households use about 142 litres of water per person a day, and in 2025 a litre of tap water cost them about a third of a Singapore cent, taxes included. The first litres, for drinking and cooking, are worth far more than that; households keep using water until the last litre is worth about its price.
Exam Matters: Asked why a demand curve slopes downward, write the chain in three linked steps and attach a figure to each, such as what each unit is worth. The label 'diminishing marginal utility' on its own explains nothing.
The price of another good and the income in buyers' pockets both change how much of a good people want at every price.
Some goods meet the same need. If the air fare on Tafari's route rises, some travellers switch to the coach, so more coach tickets are wanted at every fare: Tafari's demand curve shifts right.
Substitute: a good that can be used in place of another, so a rise in the price of one increases the demand for the other.
Other goods are used together. If hotel rooms at the destination get cheaper, the whole trip costs less, so more people travel and more coach tickets are wanted at every fare: another shift to the right.
Complementary good: a good that is used together with another, so a fall in the price of one increases the demand for the other.
Income matters too, but only for what it will buy. If your pay rises by 5% while prices rise by 8%, you can buy less than before.
Real income: income adjusted for changes in prices, which measures the quantity of goods and services that income can buy.
Normal good: a good for which demand rises when real income rises, and falls when real income falls.
Inferior good: a good for which demand falls when real income rises, and rises when real income falls.
Most goods are normal. But for many of Tafari's passengers the coach is what they use when they cannot afford to fly. So when real incomes in the city fall, Tafari's demand curve shifts right while the curve for air travel shifts left, and when real incomes rise, the reverse happens.
Real Example: In the four weeks to 22 January 2023, UK grocery prices were 16.7% higher than a year before, while regular pay was rising by about 6.7% a year: real incomes were falling. Spending on supermarkets' cheaper own-label ranges grew far faster than spending on brands, 9.3% against 1.0%, as shoppers traded down.
Exam Matters: To explain a shift, name the factor, give the direction, and join them with the reason buyers behave differently: 'flights got dearer, so some travellers switched to the coach, so more tickets are wanted at every fare'. A shift without the reason is half the chain.
What people like, how many people there are and how old they are, and what firms tell them all move a demand curve.
Tastes change with fashion, culture, health news and what people see online. A change in tastes shifts the curve with no change in price or income, so in an answer, name what changed the taste rather than writing 'tastes changed'.
More people means more buyers of most goods, so demand shifts right. But the age mix matters as much as the total, because people buy different things at different ages.
China shows how fast this can work. As births fell, the number of children in its kindergartens dropped by 5.35 million in 2023 alone, to 40.9 million, and the number of kindergartens fell by 14,808 that year.
Firms also spend money to change what buyers want.
Advertising: paid-for communication by a firm that informs consumers about a product or persuades them to buy it.
Informative advertising tells buyers that a product exists and what it does; persuasive advertising tries to make them want it. Both aim to shift the demand curve right, and persuasive advertising also makes buyers less willing to switch to a rival.
Each of these factors tells you which way a curve moved, not how far. How strongly buyers respond is a separate question, which elasticity measures.
Real Example: South Korea's exports of instant noodles, ramyeon, passed $1 billion in the first ten months of 2024 and reached a record $1.52 billion in 2025, double their 2022 level. Korea's agriculture ministry put the rise down to the global popularity of Korean dramas and films, and to viral noodle-eating challenges on social media. Tastes abroad had changed, so more noodles were wanted at every price.
Exam Matters: When a source gives population figures by age, use the age group that buys the good, not just the total, to decide the direction of the shift. For tastes, quote what changed them, such as a celebrity, a health warning or a trend online.
Elasticity tells you how strongly quantity demanded reacts to a change. Price, income and cross elasticity measure the reaction to three different causes.
A café raises the price of a coffee by 10%. You know some customers will buy less. The useful question is how many: a handful, or half of them? Elasticity puts a number on that reaction.
Every elasticity compares two percentage changes: the change in quantity demanded and the change in its cause. Percentages let you compare goods sold in different units and currencies. When quantity reacts strongly, demand is called elastic; when it hardly moves, inelastic.
Demand reacts to three causes, so there are three elasticities of demand.
Price elasticity of demand (PED): the responsiveness of the quantity demanded of a good to a change in its own price.
Income elasticity of demand (YED): the responsiveness of the quantity demanded of a good to a change in consumers' real income.
Cross elasticity of demand (XED): the responsiveness of the quantity demanded of one good to a change in the price of another good.
Two more things hold for all three. The sign, plus or minus, tells you which way quantity moved. And each measures the reaction to one cause with everything else held constant (ceteris paribus), so a measured elasticity is always an estimate.
Real Example: From June to August 2022 Germany sold a ticket for all local and regional buses and trains for 9 euros a month. In June, rail journeys of 30 km or more were 42% above June 2019, against only 3% above in May (Destatis), while road journeys fell only a little. One price cut, two reactions: train trips responded strongly to their own price, car trips hardly at all to the train's.
Exam Matters: To define PED, YED or XED, use the word 'responsiveness' and name the cause: the good's own price, real income, or the price of another good. Leave out what elastic and inelastic mean, because a definition asks only what the term is.
PED compares the percentage change in quantity demanded with the percentage change in price. The answer is almost always negative.
Price elasticity of demand is the responsiveness of quantity demanded to a change in the good's own price. To put a number on it you need two percentages, because a fall of 80 tickets matters a lot if 400 were sold and very little if 40,000 were.
Formula for price elasticity of demand: divide the percentage change in quantity demanded by the percentage change in the good's own price.
Each percentage change is the change divided by the original value, times 100. Quantity goes on top, because quantity is what reacts.
The minus sign tells you that price and quantity moved in opposite directions: the fare went up and sales went down. It is almost always there, because a higher price means fewer buyers.
The size tells you how strongly passengers reacted. Here quantity fell by half as much, in percentage terms, as the fare rose. A size below 1 like this is called price inelastic; above 1, price elastic.
Real Example: On 29 May 2023 Nigeria ended its petrol subsidy. Within days the pump price rose from about 185 naira a litre to about 500, a rise of roughly 170%. Petrol used per day fell from about 66.6 million litres in May to about 49.5 million in June, about 26% less (NMDPRA), though rising inflation and less smuggling to neighbouring countries were part of the fall. PED is roughly −26 ÷ 170, about −0.15.
Exam Matters: A Calculate question on PED gives you two prices and two quantities, often in a table. Write the formula, show both percentage changes with the original value underneath, and give the answer with its sign. If it also asks what the answer shows, add one sentence comparing the size with 1.
YED compares the change in quantity demanded with the change in real income. Its sign tells you whether people buy more or less as they get richer.
When incomes rise, people do not buy more of everything: more flights, the same amount of salt, sometimes less of the cheapest goods. Income elasticity of demand, the responsiveness of quantity demanded to real income, measures that.
Formula for income elasticity of demand: divide the percentage change in quantity demanded by the percentage change in consumers' real income.
Use real income, income adjusted for price changes. For small changes, real income growth is about the rise in money income minus inflation: 12% − 4%, about 8%. For large changes, divide instead: pay up 95% with prices up 64% is 1.95 ÷ 1.64, about 19% more, not 31%.
Read the sign first. A positive YED means demand rises with income, so the good is a normal good, like air travel and rice here. A negative YED means demand falls as income rises, so the good is an inferior good, like the coach trips that richer travellers swap for flights.
The size then says how fast demand for a normal good grows: faster than income when YED is above 1, as for air tickets, more slowly between 0 and 1, as for rice.
Real Example: In 2022 Turkey's net minimum wage rose from about 2,826 lira a month to about 5,500, nearly doubling. But consumer prices rose about 64% over the year (TurkStat), so a minimum-wage worker could buy only about a fifth more. Any YED worked out on the 95% money rise instead of the real rise would come out about five times too small.
Exam Matters: A YED Calculate gives a change in income and a change in quantity demanded, sometimes as raw figures you must turn into percentages. Show the formula, the substitution and the answer with its sign, then say in one sentence what the sign shows about the good.
XED measures how demand for one good reacts when another good's price changes. Its sign shows whether the two goods compete or go together.
A rise in the air fare on a route can fill seats on the coach, although the coach has not changed its own price. Cross elasticity of demand, the responsiveness of demand for one good to another good's price, puts a number on that link.
Formula for cross elasticity of demand: divide the percentage change in quantity demanded of one good by the percentage change in the price of another good.
The order matters. The good whose sales you are studying goes on top; the good whose price changed goes underneath. Swap them and you answer a different question.
Now read the sign. Positive means the goods are substitutes: a dearer flight sends travellers to the coach. Negative means they are complements, bought together: a cheaper coach trip brings more visitors, and they need rooms.
Keep both signs through the division. In the hotel example quantity rose, yet XED is negative, because the price that changed went down. A cheaper complement and a dearer substitute both raise demand; the sign of the price change tells them apart.
Real Example: Most cars sold in Brazil are flex-fuel: they run on petrol, on ethanol made from sugar cane, or on any mix. A common rule of thumb tells drivers to fill up with ethanol when it costs less than about 70% of the price of petrol, because a litre of ethanol takes the car less far. So a rise in the petrol price raises ethanol sales: a positive XED.
Exam Matters: An XED Calculate names two goods. Before you substitute, write which good's quantity and which good's price you are using. Give the answer with its sign and add one clause saying what the sign shows about the two goods.
Ignore the minus sign and compare the size of PED with 1. It tells you whether buyers react by more or less than the price changed.
A PED of −0.5 and a PED of −2 describe very different buyers. To read a value, ignore the minus sign and compare the size with 1. Steep and shallow only compare curves drawn through the same point on the same axes, so read the number, not the picture.
Price elastic demand: demand for which the percentage change in quantity demanded is greater than the percentage change in price, so the size of PED is greater than 1.
Price inelastic demand: demand for which the percentage change in quantity demanded is smaller than the percentage change in price, so the size of PED is between 0 and 1.
Unitary price elastic demand: demand for which the percentage change in quantity demanded equals the percentage change in price, so the size of PED is exactly 1.
On Tafari's coach route, a fare rise from $10 to $12 gives PED = −0.5: price inelastic, because 0.5 is below 1. Higher up the same demand curve, a rise from $20 to $22 cuts sales from 400 to 320 a day and gives PED = −2: price elastic.
Real Example: In 2014, in a dispute with the publisher Hachette, Amazon said that for every e-book it would sell at $14.99, it would sell 1.74 copies at $9.99. A price cut of about a third raised quantity by 74%: a PED of about −2.2, price elastic. That is why Amazon wanted lower prices: 1.74 copies at $9.99 bring in about 16% more than one at $14.99.
Exam Matters: When a question gives you a PED value, write three things: the value, its name, and what it means for the decision in the question, such as how far sales fall if the price rises.
Demand is price inelastic when buyers cannot easily switch to something else or do without. Five factors decide how easy that is.
Why do some buyers shrug off a price rise while others walk away? Ask how easily this buyer can switch to something else, or do without. Each of the five factors changes the answer.
Branding: the use of a name, logo and image to make a product distinct from its rivals in buyers' minds.
Durable good: a good that lasts and is used over a long period, such as a car or a fridge.
The first factor runs through the others. A strong brand makes buyers stop treating rivals as substitutes; a durable good has a substitute in time, because the old one can be kept; an addiction removes the option of doing without.
So the same product can be inelastic in one sense and elastic in another. Petrol as a whole is inelastic, but one filling station faces elastic demand if another sits across the road. And demand usually becomes more elastic the longer a price rise lasts, as buyers find substitutes.
Real Example: A study of air travel for the airlines' association IATA (InterVISTAS, 2007) found that PED depends on how widely you draw the market. For a single route it was about −1.4: travellers can switch airline or route. For all flights within a country it was about −0.8, and for a group of countries about −0.6, because there are fewer ways to avoid paying more for flying itself.
Exam Matters: In an Analyse question on PED, two factors developed fully beat five named. Take each through the chain for the product in the question: the feature, what it does to switching, the effect on PED, and what that means if the price rises.
Total revenue is the money a firm takes from its sales: the price multiplied by the quantity sold. It is not profit.
A market stall sells 50 mangoes at $2 each. It takes $100. That is all total revenue is: the price multiplied by the number of units sold at that price.
Total revenue (TR): the total amount of money a firm receives from selling its output over a period of time.
Revenue is not profit. Profit is what is left once costs are paid, so a firm can take more revenue and still make less profit if serving the extra customers costs more than they pay.
Read down the list. As the fare rises, revenue first rises, peaks at $15 and then falls. A higher fare brings in more on each ticket still sold but loses the tickets no longer sold, and which effect wins depends on how strongly passengers react to the price.
On a demand diagram, total revenue is a rectangle under the point on the curve: the price up the side and the quantity along the bottom. At $10 it is $10 tall and 800 tickets wide.
Real Example: In the year to March 2025, Ireland's Ryanair cut its average fare by 7% and carried 9% more passengers, a record 200 million. Its revenue from fares rose only 1%, to about 9.2 billion euros: the lower price on every ticket almost cancelled out the extra tickets. And while revenue rose, profit after tax fell, from about 1.9 billion euros to 1.6 billion.
Exam Matters: A total revenue Calculate is quick arithmetic, so show all of it: the formula, the price times the quantity, and the answer with its units and period, such as $8,640 a day. When you compare two prices, give both totals and the change between them.
A straight demand curve has the same slope all the way down, but not the same elasticity. Demand is elastic at high prices and inelastic at low ones.
It is tempting to give a straight demand curve one elasticity. But elasticity compares percentage changes, while the slope compares changes in units, and along a straight line the same change in units is a different percentage at every point.
On Tafari's line, every $1 off the fare sells 40 more tickets a day. Near the top, at $20, a $1 cut is only 5% of the price, but the 40 extra tickets are 10% of the 400 sold. Near the bottom, at $10, the same $1 is 10% of the price, and the 40 tickets are only 5% of the 800 sold.
So the reaction is strong at high prices and weak at low ones: between $20 and $22 PED is −2, price elastic; between $10 and $12 it is −0.5, price inelastic.
The midpoint of a straight demand curve, halfway between the points where it meets the two axes, is where PED is −1, unitary. On Tafari's line that is a fare of $15 and 600 tickets a day. Above the midpoint demand is price elastic; below it, price inelastic.
Towards the two ends the values run to their limits: near $30, where nobody buys, the size of PED grows without limit; near a fare of zero, PED shrinks towards zero. So never say a firm's demand 'is elastic' without saying at what price.
Real Example: In January 2013 Tallinn, Estonia's capital, made its buses and trams free for registered residents. Researchers found passenger numbers rose about 3% soon after, and put only about 1.2% of that down to the free fares; the rest came from new bus lanes and more frequent services (Cats and others, 2014). A price cut of 100% at the bottom of the demand curve won very few extra trips: near a price of zero, PED is close to zero.
Exam Matters: A Draw question here needs one straight demand curve with labelled axes, the midpoint marked as PED = −1 (unitary), and the elastic and inelastic ranges labelled above and below it. Add one sentence giving the reason: the same change is a different percentage at high and low prices.
Whether a price rise brings in more money depends on PED. Where demand is inelastic, price and revenue move together; where it is elastic, they move apart.
A price rise does two things to a firm's takings. It gains on every unit still sold, because each now costs more. It loses on every unit no longer sold. Total revenue rises only if the gain is bigger than the loss.
When demand is price inelastic, few buyers leave, so the gain wins: price and revenue move in the same direction. When demand is price elastic, many leave, so the loss wins: price and revenue move in opposite directions. Where PED is −1 the two cancel, which is why Tafari's revenue peaks at $9,000, at a fare of $15.
One caution: the fare that brings in the most revenue is not always the one that makes the most profit. Carrying 600 passengers at $15 may cost more than carrying 400 at $20.
Real Example: Record cocoa prices pushed the Swiss chocolate maker Lindt & Sprüngli to raise its prices by 19% in 2025. Its organic sales rose 12.4%: price rises added about 19 points, while lower volumes and a changed product mix took away 6.6 (Lindt & Sprüngli). That is a PED of roughly −0.35: inelastic, so the higher prices brought in more money.
Exam Matters: When a question asks how a price change affects revenue, build the chain: the PED value, inelastic or elastic, the gain on units still sold against the loss on units no longer sold, and the direction revenue moves. If figures are given, work out revenue before and after.
Read the sign of YED first, then its size. Together they say whether a good is inferior, a necessity or a luxury, and what a recession does to its sales.
The sign of YED separates normal goods from inferior goods. Demand for a normal good rises with real income, so its YED is positive; demand for an inferior good falls as people can afford something they prefer, so its YED is negative. The size then splits normal goods into two kinds.
Income elastic demand: demand for which the percentage change in quantity demanded is greater than the percentage change in real income, so YED is greater than 1.
Income inelastic demand: demand for which the percentage change in quantity demanded is smaller than the percentage change in real income, so YED is between 0 and 1.
Goods with income elastic demand are often called luxuries, and goods with income inelastic demand necessities. Here is what each means when real incomes fall:
So a recession does not hit every firm alike: sellers of luxuries lose sales fastest, sellers of necessities a little, and sellers of inferior goods can gain.
Real Example: In 2022 households in Nigeria, Kenya and Bangladesh spent, on average, more than half of their consumer spending on food, against well under a tenth in the United States (US Department of Agriculture). Richer households buy more and better food, but food takes a smaller share of their budgets as incomes rise: demand for food as a whole is income inelastic, a necessity.
Exam Matters: When an extract describes a boom or a recession, YED is usually what the question is testing. Classify the good from the sign and size of YED, say which way and how fast its demand moves, and name what the firm should do about it.
The sign of XED says how two goods are related, and its size says how strongly. A firm uses both to find its real rivals and its partners.
Which firms does a coach company really compete with? XED answers with numbers: the sign tells you the kind of link between two goods, and the size how close it is.
Unrelated goods: goods for which a change in the price of one has no effect on the quantity demanded of the other, so XED is zero.
Read the size as a multiplier. At +2.5, a 10% cut in a rival's fare would cut Tafari's sales by about 25%: a fare war Tafari must answer. At +0.6, a 10% rise in the air fare raises coach sales by only about 6%: worth watching, not worth copying.
The same holds for complements: at −0.4, hotel nights and coach trips are loosely linked; well above 1 in size, the goods are bought as a pair, so a firm can price one low to sell more of the other.
Real Example: Printers and ink are bought together: ink is no use without a printer that takes it. For years many printers were sold cheaply, with the money made on cartridges. In 2010 Epson launched its EcoTank printers in Indonesia the other way round, a dearer printer with cheap bottles of ink, and by October 2024 it had sold more than 100 million. Either plan only works if the XED between printer and ink is strongly negative.
Exam Matters: Where a question is about competitors or about goods sold together, XED is the tool. Give the sign and the relationship, then the strength, then a consequence that names a decision: match a rival's price, or price one good low to sell the other.
Each elasticity helps a firm with a different decision: what to charge, what to sell as incomes change, and which rivals to watch.
An elasticity is an estimate of how buyers will react. A firm that knows its elasticities can make three decisions with more confidence.
PED also tells a firm how much of a rise in its own costs it can pass on. With inelastic demand it can raise its price and keep most of its customers; with elastic demand it may have to absorb much of the cost.
But an elasticity starts a decision rather than ending it. Each estimate comes from past sales, and buyers may not react the same way next time. Each also holds everything else constant, and real markets do not: if a rival cuts its price just as you raise yours, you lose more customers than your PED predicted. And the price that brings in the most revenue may not make the most profit, once costs are counted.
Real Example: In 2023 China's Luckin Coffee began selling many drinks for 9.9 yuan, far below Starbucks' prices, and its revenue in China soon passed Starbucks'. From April to June 2024 Starbucks' comparable sales in China fell 14%, with 7% fewer transactions and orders 7% smaller on average. A rival's price can only do that much damage if the XED between the two chains is strongly positive.
Exam Matters: In a longer question on a firm's decision, use the elasticity the question gives, say what it predicts, then weigh it: how old is the estimate, what else might change, how will rivals react? End with what the firm should do.
For buyers, elasticity decides who feels a price rise. Buyers who keep buying take it on their budget; buyers who can switch or cut back avoid part of it.
When a price rises, a buyer can keep buying and pay more, or buy less and switch. Elasticity measures which buyers do which, and so who feels the rise.
Take two households that each spent $100 a month on a good whose price rises 10%. One has a PED of −0.2: it buys 2% less and now spends about $108, so the higher price lands on its budget. The other has a PED of −2: it buys 20% less, spends about $88, and moves the rest of its money to substitutes.
A close substitute, one with a strongly positive XED, is a buyer's best protection: the buyer can move, and that threat keeps prices down. So advice to consumers is about making demand more elastic: compare prices, try the unbranded version, switch supplier.
Habit and inertia work the other way. Inertia, staying with a current choice even when a better option exists because changing takes time and effort, makes a buyer act as if there were no substitute, so they keep paying more than they need to.
Price rises in necessities, such as food and fuel, also fall hardest on low-income households, because those goods take a larger share of their budgets.
Real Example: In 2020 Australia's competition regulator, the ACCC, found that people whose home loans were three to five years old paid about 0.58 percentage points more interest than new customers of the same bank, and those with loans over ten years old about 1.04 points more. On a $250,000 loan in the first group, switching or asking for a better rate could save more than $1,400 in the first year. Borrowers who stayed put rather than spend the time and effort to switch were paying for inertia.
Exam Matters: When a question names consumers, keep the answer on them: what happens to their spending, which substitutes they have, and which consumers are hit hardest, such as low-income households buying necessities.
A government that taxes a good wants revenue, a change in behaviour, or both. PED decides which of the two it mostly gets.
Governments tax many things people buy, from fuel to alcohol. The seller pays the tax to the government but usually raises its price to cover some or all of it, so buyers pay more.
Indirect tax: a tax on spending on goods and services, paid to the government by the seller, who can pass some or all of it on to buyers in a higher price.
What happens next depends on PED. Suppose the tax raises the price of a good by 20%.
So one tax rarely does both jobs fully. To raise revenue, a government taxes goods with inelastic demand; to change behaviour, it needs elastic demand, or a cheaper substitute buyers can move to.
The other two elasticities matter too. YED shows how tax receipts grow as incomes rise: taxes on income elastic goods grow fastest in a boom. XED warns where buyers will go: if an untaxed substitute exists, or the good is cheaper across a border, buyers move there and the tax collects less.
PED also raises a question of fairness: goods with inelastic demand are often necessities or habits, and a tax on them takes a bigger share of a low income than a high one.
Real Example: On 1 March 2017 Lithuania raised its excise duties, the indirect taxes on each unit of alcohol sold, by 112% for beer, 111% for wine and 23% for spirits. Drinking per adult fell by about 6.8% that year, yet alcohol tax revenue rose by about a fifth in the first year, more than 100 million euros, and alcohol-related deaths fell (Rehm and others, 2025). Demand was inelastic enough for revenue to rise, and responsive enough to change some behaviour.
Exam Matters: When a question is about a tax, name the government's aim first: revenue, or a change in behaviour. Use the PED figure to say which the tax will mostly achieve, then weigh it with XED (untaxed substitutes, buying across a border) or fairness.
Economics starts by assuming that buyers and sellers each choose with a purpose, weighing what an option is worth against what it costs.
To get the most satisfaction from your money, judge each extra unit on its own: buy it only if it is worth at least its price.